SCHWABFUNDS-Registered TradeMark-
SCHWAB
BOND INDEX
FUNDS
Semiannual Report
February 28, 1999
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SCHWAB BOND INDEX FUNDS-REGISTERED TRADEMARK-
We're pleased to bring you this semiannual report for the following funds (the
Funds) for the six-month period ended February 28, 1999:
- Schwab Short-Term Bond Market Index Fund
- Schwab Total Bond Market Index Fund
During the reporting period, the Funds continued to provide a high level of
current income consistent with the preservation of capital. In addition to
performance and portfolio information, this report contains information
regarding dividends paid by the Funds during each fiscal year (or reporting
period) since their inceptions.
The Schwab Short-Term Bond Market Index Fund seeks to track the total return of
the Lehman Brothers Short (1-5 Year) Government/Corporate Index, which
represents the performance of U.S. government and corporate bonds that have
average maturities of between one and five years. The Schwab Total Bond Market
Index Fund seeks to track the total return of the Lehman Brothers Aggregate Bond
Index, a broad-based index that includes U.S. government and investment-grade
debt securities, such as corporate and international (dollar-denominated) bonds
and asset-backed and mortgage-backed securities with maturities greater than one
year.
As you may recall, changes to the Funds investment objectives were approved by
shareholders in 1997. Implementation of the change began on November 1, 1997,
when the Funds converted from an actively managed strategy to an index strategy.
The transition was completed as of March 1, 1998.
CONTENTS
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Bond Fund Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
Schwab Short-Term Bond Market Index Fund
FUND PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ----------------------------------------------------
Schwab Total Bond Market Index Fund
FUND PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ----------------------------------------------------
Dividends Paid 16
- ----------------------------------------------------
The Portfolio Management Team 17
- ----------------------------------------------------
Fund Discussion 18
- ----------------------------------------------------
Glossary 20
- ----------------------------------------------------
Financial Statements and Notes 23
- ----------------------------------------------------
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
[PHOTO]
Over the past six months, equity investors have been subject to sharp drops and
big recoveries--sometimes within the same day. After enjoying near-perfect
market conditions for the past several years, investors have had to adjust to
significant economic and political developments, both here and abroad, that have
contributed to rapid sentiment swings and market turbulence. These developments
have been accentuated by the lingering expectation that stock prices are long
overdue for a correction according to several traditional, widely followed
indicators. In spite of this recent volatility, however, the markets continue to
flourish, boosted by record low inflation, solid economic growth, low interest
rates, a strong dollar and an influx of money from investors.
All of this serves to remind us that although the market's extreme ups and downs
can be harrowing, they are a natural part of market dynamics. That's why we
think it's a good time to reaffirm one of our primary investment principles:
Regardless of short-term market trends, our philosophy has always been that
REGULAR INVESTING is the best strategy over the long term. And your investment
in a bond fund may play an important role in your asset allocation. We've
included some guidelines on the following pages that address some things you
should know about bond funds. You might also find that more than one kind of
bond fund may be appropriate for you, depending on your goals and financial
situation. As always, feel free to contact us if you have any questions.
The support of investors like you has helped Charles Schwab Investment
Management, Inc. (CSIM) become one of the largest and fastest-growing mutual
fund families in the nation. CSIM now manages more than $87 billion in assets on
behalf of more than 3.5 million SchwabFunds-Registered Trademark- shareholders.
We offer a broad spectrum of 38 mutual funds for investors with varying
financial situations and goals.
Thank you for your investment in SchwabFunds. We continue to do everything we
can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
February 28, 1999
YEAR 2000 ISSUES
One issue with the potential to disrupt fund operations and affect
performance is the inability of some computers to recognize the year 2000.
The investment adviser is taking steps to handle this issue. The investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. It is impossible to know in
advance, however, exactly how this issue will affect fund administration,
fund performance or securities markets in general.
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WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within one of the mutual funds you own. As you
probably know, stocks historically have offered higher long-term returns than
other asset classes, such as bonds or cash, but those returns have come at the
price of higher volatility. To help mitigate some of that risk, many investors
often include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future returns.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment experts who know
and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds are ideal for investors who lack the time or expertise to
actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $1,000.
CONVENIENCE: Bond fund investors can make purchases and redemptions at any time
without transaction fees and without having to wait until an individual bond
matures.
FLEXIBILITY: Dividends and/or capital gains can be reinvested or paid in cash.
LOW COSTS: By trading in large (institutional) blocks, funds can get much better
execution, which can lower trading costs and increase total returns.
BOND INDEX FUNDS
Schwab's Bond Index Funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally have lower portfolio turnover
and fewer transactions--and therefore lower trading costs--you could potentially
realize higher returns.
In addition to some of the same benefits of equity index funds, including broad
diversification, lower expenses, consistent investment style and straightforward
choices, bond index funds can also provide the added benefit of
high-credit-quality investments. Schwab's Bond Index Funds are designed to
maintain high-credit-quality standards because the indices they seek to track
primarily comprise U.S. Treasuries, government agency securities and government
agency mortgage-backed securities; the remaining bonds in the indices are
investment-grade corporate bonds rated AAA through BBB, the four highest credit
ratings.
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TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your tax bill.(1) And, if you live in a state with a
high personal state income tax or other personal tax, you may be better served
by choosing a double tax-free fund that provides income free from federal, state
and, in some cases, local income taxes.
BOND FUNDS AT SCHWAB
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
BOND INDEX FUNDS
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short (1-5 Year) Government/ Corporate Index. This index represents the
performance of U.S. government and corporate bonds that have average maturities
between one and five years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broad-based index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
invests primarily in securities issued by or on behalf of the state of
California and its political subdivisions, agencies and instrumentalities, and
seeks to maintain a dollar-weighted average maturity of 10 years or longer. It
is designed to provide higher tax-free income than is available with
shorter-term funds; however, its net asset value may be more volatile than that
of shorter-term bond funds.
If you would like more information on any of these funds, please call us toll
free at 800-435-4000 and request a free prospectus, which contains more
information, including fees and expenses. Please be sure to read the prospectus
before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods that
allow you to invest or transfer money to your Schwab account on a regular basis,
you can also invest through our Web site at WWW.SCHWAB.COM; through our
automated touch-tone telephone service, TeleBroker,-Registered Trademark- by
calling 800-272-4922; or in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
(1) Some investors may be subject to AMT; consult your tax advisor.
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MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
remarkable expansion with a strong real growth rate of 4.3% during 1998--a rate
well in excess of the Federal Reserve's target range of 2.5% to 3.0%. The
fourth-quarter growth rate of 6.0% marks the thirty-first consecutive quarter of
positive growth--the longest peacetime expansion ever. Strong consumer spending
leveraged by record domestic stock market levels and its associated wealth
effect continued to provide momentum for this historic expansion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 1.7%
Q2 1995 0.4%
Q3 1995 3.3%
Q4 1995 2.8%
Q1 1996 3.3%
Q2 1996 6.1%
Q3 1996 2.1%
Q4 1996 4.2%
Q1 1997 4.2%
Q2 1997 4.0%
Q3 1997 4.2%
Q4 1997 3.0%
Q1 1998 5.5%
Q2 1998 1.8%
Q3 1998 3.7%
Q4 1998 6.0%
Source: BLOOMBERG L.P.
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth, albeit at a more moderate rate than
in 1998. High levels of consumer confidence, low interest rates, rising real
wages and strong gains in stock prices have been the principal factors
contributing to this lengthy expansion. Although economic problems across the
globe continue to be an ongoing area of concern for the U.S. economy, the effect
of these problems thus far has been less severe than many originally predicted.
Going forward, the behavior of domestic consumers in response to recent stock
market volatility may also be a key determinant of whether the economy continues
on its current course or softens in 1999.
UNEMPLOYMENT
After declining to 4.3% in December and January-- the lowest level in 28
years--the U.S. unemployment rate stood at 4.4% in February. Labor markets
continue to be extremely tight as growth in the labor force has slowed, leading
to some concern that wage increases may begin to put more pressure on labor
costs (refer to Employment Cost Index below).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
U.S. UNEMPLOYMENT RATE
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.6%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.6%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
SOURCE: BLOOMBERG L.P.
INFLATION
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.6% for the 12-month period ended February 28, 1999. Its core
rate (which excludes the more volatile food and energy components) rose 2.1%.
For all of 1998, overall producer prices fell 0.1% after dropping 1.2% in 1997,
marking the first time that the index, which was created in 1947, has fallen for
two consecutive years.
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The Employment Cost Index (which measures inflation in wages, salaries and
benefits) increased 3.4% for the year ended December 1998, its largest
calendar-year increase since 1993.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
Jan-90 5.5% 5.2%
Feb-90 5.5% 5.3%
Mar-90 5.5% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.2% 4.8%
Aug-90 5.2% 5.6%
Sep-90 5.2% 6.2%
Oct-90 4.9% 6.3%
Nov-90 4.9% 6.3%
Dec-90 4.9% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.6% 4.9%
May-91 4.6% 5.0%
Jun-91 4.6% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.3% 2.9%
Nov-91 4.3% 3.0%
Dec-91 4.3% 3.1%
Jan-92 4.0% 2.6%
Feb-92 4.0% 2.8%
Mar-92 4.0% 3.2%
Apr-92 3.6% 3.2%
May-92 3.6% 3.0%
Jun-92 3.6% 3.1%
Jul-92 3.5% 3.2%
Aug-92 3.5% 3.1%
Sep-92 3.5% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.5% 3.3%
Feb-93 3.5% 3.2%
Mar-93 3.5% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.5% 2.8%
Nov-93 3.5% 2.7%
Dec-93 3.5% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.2% 2.4%
May-94 3.2% 2.3%
Jun-94 3.2% 2.5%
Jul-94 3.2% 2.8%
Aug-94 3.2% 2.9%
Sep-94 3.2% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 2.9% 2.8%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 2.9% 3.1%
May-95 2.9% 3.2%
Jun-95 2.9% 3.0%
Jul-95 2.7% 2.8%
Aug-95 2.7% 2.6%
Sep-95 2.7% 2.5%
Oct-95 2.7% 2.8%
Nov-95 2.7% 2.6%
Dec-95 2.7% 2.5%
Jan-96 2.8% 2.7%
Feb-96 2.8% 2.7%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.8% 3.0%
Aug-96 2.8% 2.9%
Sep-96 2.8% 3.0%
Oct-96 2.9% 3.0%
Nov-96 2.9% 3.3%
Dec-96 2.9% 3.3%
Jan-97 2.9% 3.0%
Feb-97 2.9% 3.0%
Mar-97 2.9% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.3% 2.1%
Nov-97 3.3% 1.8%
Dec-97 3.3% 1.7%
Jan-98 3.3% 1.6%
Feb-98 3.3% 1.4%
Mar-98 3.3% 1.4%
Apr-98 3.5% 1.4%
May-98 3.5% 1.7%
Jun-98 3.5% 1.7%
Jul-98 3.5% 1.7%
Aug-98 3.7% 1.6%
Sep-98 3.7% 1.5%
Oct-98 3.4% 1.5%
Nov-98 3.4% 1.5%
Dec-98 3.4% 1.6%
Jan-99 1.7%
Feb-99 1.6%
Source: Bloomberg L.P.
Although price inflation has been well contained, the combination of a tight
labor market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Non-farm productivity grew at an annualized rate of 2.2% in 1998, continuing a
healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
Following a sharp correction in July and August, the domestic equities market
rallied strongly during the six-month reporting period ended February 28, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1 INVESTMENT
MSCI-EAFE-REGISTERED S&P 500-REGISTERED
TRADEMARK-(ND)INDEX TRADEMARK INDEX
Aug-98 $1.000 $1.000
Sep-98 $0.969 $1.064
Oct-98 $1.070 $1.151
Nov-98 $1.125 $1.220
Dec-98 $1.170 $1.291
Jan-99 $1.166 $1.345
Feb-99 $1.138 $1.303
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1 INVESTMENT
RUSSELL 2000-REGISTERED LEHMAN AGGREGATE
TRADEMARK INDEX BOND INDEX
Aug-98 $1.000 $1.000
Sep-98 $1.078 $1.023
Oct-98 $1.122 $1.018
Nov-98 $1.181 $1.024
Dec-98 $1.254 $1.027
Jan-99 $1.271 $1.034
Feb-99 $1.168 $1.016
COMPILED BY CHARLES SCHWAB & CO., INC.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent returns of specific market sectors during the reporting period and do
not reflect the performance of any fund. Indices are unmanaged and, unlike a
fund, do not reflect the payment of advisory fees and other expenses associated
with an investment in a fund. Investors cannot invest in an index directly.
Large-cap domestic stocks, as represented by the S&P 500 Index, continued to be
the strongest-performing asset class, achieving a total return of 30.3% for the
six-month period. Within the S&P 500, the strongest performance was concentrated
in the very largest stocks. Small-cap stocks, as represented by the Russell 2000
Index, also experienced a strong total return of 16.8%.
International stock returns were characterized by the markedly divergent
performance between Asian markets, most of which languished, and European
markets, most of which experienced healthy gains for the period. Combined,
international stock returns, as represented by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI-EAFE) Index, experienced a
positive total return of 13.8% for the six-month reporting period.
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MARKET OVERVIEW (continued)
Reflecting the moderate rise in intermediate- and long-term interest rates,
fixed income returns were generally weak for the period. Bond returns, as
represented by the Lehman Brothers Aggregate Bond Index, were 1.6% for the
six-month reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio (P/E) for the S&P 500 Index reached new record highs
during the reporting period and ended the period at a lofty 32.5 times earnings.
The P/E, also known as a multiple, is the price of a stock divided by its
earnings per share and generally indicates how much investors are willing to pay
for a company's earning potential. Based on other traditional market valuation
measures, such as the price-to-book value ratio or dividend yield, the U.S.
stock market continues to remain at high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
S&P 500 PRICE/EARNINGS RATIO
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.73
Feb-99 32.47
30-Year Average 15.08
Source: BLOOMBERG L.P.
TREASURY YIELDS
During the first two months of the reporting period, Treasury yields continued
to decline--a trend that began in the second quarter of 1997. This was largely a
response to international economic problems as investors seeking a safe haven
increased demand for U.S. Treasury securities and bid up prices, thereby
decreasing Treasury bond yields. Other factors that contributed to favorable
fixed income market conditions included the Federal Reserve's decision to leave
rates unchanged throughout most of 1998, which was due in part to international
market turbulence, and positive economic statistics. This showed strong growth
coupled with contained inflation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
30-YEAR TREASURY FIVE-YEAR TREASURY
BOND YIELD NOTE YIELD
8/7/98 5.63% 5.38%
8/14/98 5.54% 5.33%
8/21/98 5.43% 5.19%
8/28/98 5.34% 4.90%
9/4/98 5.29% 4.89%
9/11/98 5.23% 4.65%
9/18/98 5.15% 4.52%
9/25/98 5.11% 4.37%
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
11/6/98 5.39% 4.59%
11/13/98 5.25% 4.50%
11/20/98 5.22% 4.60%
11/27/98 5.16% 4.59%
12/4/98 5.04% 4.39%
12/11/98 5.02% 4.39%
12/18/98 5.00% 4.36%
12/25/98 5.22% 4.71%
1/1/99 5.10% 4.54%
1/8/99 5.27% 4.73%
1/15/99 5.11% 4.55%
1/22/99 5.08% 4.52%
1/29/99 5.09% 4.55%
2/5/99 5.35% 4.86%
2/12/99 5.42% 4.96%
2/19/99 5.39% 4.99%
2/26/99 5.58% 5.22%
SOURCE: BLOOMBERG L.P.
6
<PAGE>
In an effort to provide liquidity to financial markets and shelter the U.S.
economy from the impact of increasing weakness in foreign economies, the Federal
Reserve cut short-term interest rates three times during September and October.
At the time of this writing, the federal funds rate stands at 4.75%.
Toward the end of the reporting period, in response to both continued strong
domestic economic growth and scaled-back concerns about the impact of
international economic problems, Treasury yields reversed course, ending the
period approximately 1% higher than their lows reached in October.
7
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (11/5/91)
- ------------------------------------------------------------------------------
SCHWAB SHORT-TERM
BOND MARKET INDEX
FUND(2),(3) 1.50% 5.31% 5.12% 5.81%
- ------------------------------------------------------------------------------
Benchmark Indices(4) 2.05% 6.02% 6.01% 6.06%
- ------------------------------------------------------------------------------
Lehman Brothers Short
(1-3 Year)
U.S. Government Bond
Index (PRIOR) 2.26% 6.01% 6.01% 6.00%
- ------------------------------------------------------------------------------
Lehman Brothers Short
(1-5 Year)
Government/Corporate
Bond Index (NEW) 2.05% 6.03% 6.19% 6.52%
- ------------------------------------------------------------------------------
30-DAY SEC
YIELD
- ----------------------------------------------------
SCHWAB SHORT-TERM
BOND MARKET INDEX FUND(2),(3) 4.86%
- ----------------------------------------------------
Benchmark Indices(4) N/A
- ----------------------------------------------------
Lehman Brothers Short (1-3 Year)
U.S. Government Bond Index (PRIOR) N/A
- ----------------------------------------------------
Lehman Brothers Short (1-5 Year)
Government/Corporate Bond Index (NEW) N/A
- ----------------------------------------------------
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 3.94%, 6.96%,
5.08% and 6.04%, respectively. The 30-day SEC yield as of 12/31/98 was 4.59%.(5)
(1) Actual, not annualized, since period is less than one year.
(2) Prior to 11/1/97, the Schwab Short-Term Bond Market Index Fund was known as
the Schwab Short/Intermediate Government Bond Fund. As reported in the
Fund's annual report dated 8/31/97, shareholders approved the proposed
change to the Fund's investment objective from an actively managed
government bond strategy to an index strategy at the shareholders' meeting
held on 9/22/97.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
1.30%, 4.88%, 4.78% and 5.44%, respectively. The 30-day SEC yield as of
2/28/99 would have been 4.60%.
(4) This index represents the Lehman Brothers Short (1-3 Year) U.S. Government
Bond Index for the period from the Fund's inception on 11/5/91 through
2/28/98, and the Lehman Brothers Short (1-5 Year) Government/Corporate Index
from 3/1/98 through the end of the reporting period. This benchmark is
designed to show investors how a hypothetical $10,000 investment in the Fund
has performed since its inception to the end of the reporting period by
comparing it with the Fund's prior and new indices.
(5) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
3.72%, 6.50%, 4.75% and 5.67%, respectively. The 30-day SEC yield as of
12/31/98 would have been 4.14%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SCHWAB SHORT- LEHMAN BROTHERS
TERM BOND LEHMAN BROTHERS SHORT (1-5) U.S.
MARKET INDEX SHORT (1-3) GOVERNMENT/ BENCHMARK
FUND US GOVERNMENT INDEX CORPORATE INDEX INDEX
11/5/91 $10,000 $10,000 $10,000 $10,000
11/30/91 $10,117 $10,059 $10,097 $10,097
12/31/91 $10,381 $10,212 $10,287 $10,250
1/31/92 $10,241 $10,199 $10,243 $10,237
2/29/92 $10,240 $10,229 $10,272 $10,268
3/31/92 $10,190 $10,226 $10,251 $10,265
4/30/92 $10,282 $10,319 $10,349 $10,358
5/31/92 $10,440 $10,415 $10,477 $10,455
6/30/92 $10,595 $10,521 $10,614 $10,560
7/31/92 $10,794 $10,642 $10,778 $10,682
8/31/92 $10,898 $10,728 $10,884 $10,768
9/30/92 $11,053 $10,829 $11,012 $10,869
10/31/92 $10,924 $10,767 $10,903 $10,807
11/30/92 $10,868 $10,751 $10,868 $10,791
12/31/92 $11,012 $10,851 $10,990 $10,891
1/31/93 $11,202 $10,965 $11,164 $11,006
2/28/93 $11,355 $11,052 $11,298 $11,094
3/31/93 $11,395 $11,087 $11,339 $11,128
4/30/93 $11,499 $11,154 $11,428 $11,196
5/31/93 $11,462 $11,128 $11,394 $11,169
6/30/93 $11,622 $11,211 $11,518 $11,253
7/31/93 $11,661 $11,236 $11,541 $11,278
8/31/93 $11,823 $11,329 $11,679 $11,371
9/30/93 $11,851 $11,365 $11,718 $11,408
10/31/93 $11,892 $11,390 $11,748 $11,433
11/30/93 $11,819 $11,392 $11,725 $11,435
12/31/93 $11,873 $11,438 $11,773 $11,481
1/31/94 $11,973 $11,509 $11,873 $11,552
2/28/94 $11,780 $11,439 $11,754 $11,482
3/31/94 $11,628 $11,380 $11,637 $11,423
4/30/94 $11,527 $11,337 $11,569 $11,380
5/31/94 $11,485 $11,353 $11,582 $11,396
6/30/94 $11,500 $11,381 $11,602 $11,424
7/31/94 $11,599 $11,484 $11,732 $11,527
8/31/94 $11,628 $11,522 $11,770 $11,565
9/30/94 $11,585 $11,495 $11,708 $11,538
10/31/94 $11,593 $11,522 $11,722 $11,565
11/30/94 $11,528 $11,473 $11,662 $11,516
12/31/94 $11,540 $11,495 $11,688 $11,538
1/31/95 $11,697 $11,654 $11,867 $11,697
2/28/95 $11,852 $11,815 $12,072 $11,859
3/31/95 $11,919 $11,883 $12,141 $11,928
4/30/95 $12,018 $11,989 $12,268 $12,034
5/31/95 $12,232 $12,197 $12,553 $12,243
6/30/95 $12,281 $12,263 $12,627 $12,309
7/31/95 $12,308 $12,314 $12,657 $12,360
8/31/95 $12,396 $12,388 $12,747 $12,435
9/30/95 $12,470 $12,449 $12,820 $12,495
10/31/95 $12,572 $12,552 $12,943 $12,599
11/30/95 $12,696 $12,659 $13,080 $12,706
12/31/95 $12,799 $12,754 $13,194 $12,802
1/31/96 $12,900 $12,862 $13,315 $12,910
2/29/96 $12,817 $12,812 $13,225 $12,860
3/31/96 $12,778 $12,803 $13,184 $12,851
4/30/96 $12,776 $12,816 $13,173 $12,864
5/31/96 $12,777 $12,844 $13,182 $12,892
6/30/96 $12,878 $12,938 $13,298 $12,986
7/31/96 $12,917 $12,988 $13,346 $13,037
8/31/96 $12,940 $13,036 $13,380 $13,085
9/30/96 $13,072 $13,155 $13,528 $13,204
10/31/96 $13,235 $13,304 $13,717 $13,353
11/30/96 $13,368 $13,402 $13,849 $13,452
12/31/96 $13,311 $13,405 $13,813 $13,455
1/31/97 $13,378 $13,469 $13,877 $13,520
2/28/97 $13,397 $13,501 $13,904 $13,552
3/31/97 $13,355 $13,491 $13,860 $13,541
4/30/97 $13,477 $13,601 $13,994 $13,652
5/31/97 $13,575 $13,696 $14,097 $13,748
6/30/97 $13,680 $13,791 $14,208 $13,843
7/31/97 $13,874 $13,941 $14,418 $13,994
8/31/97 $13,841 $13,955 $14,398 $14,008
9/30/97 $13,964 $14,061 $14,532 $14,114
10/31/97 $14,091 $14,165 $14,663 $14,218
11/30/97 $14,130 $14,201 $14,691 $14,254
12/31/97 $14,228 $14,296 $14,798 $14,349
1/31/98 $14,383 $14,433 $14,969 $14,487
2/28/98 $14,358 $14,446 $14,969 $14,500
3/31/98 $14,415 $14,502 $15,022 $14,551
4/30/98 $14,479 $14,572 $15,095 $14,622
5/31/98 $14,563 $14,649 $15,188 $14,711
6/30/98 $14,643 $14,725 $15,273 $14,794
7/31/98 $14,697 $14,795 $15,337 $14,856
08/31/98 $14,898 $14,975 $15,551 $15,064
09/30/98 $15,152 $15,177 $15,842 $15,346
10/31/98 $15,204 $15,252 $15,887 $15,389
11/30/98 $15,175 $15,236 $15,874 $15,376
12/31/98 $15,214 $15,294 $15,928 $15,429
01/31/99 $15,258 $15,352 $16,008 $15,506
02/28/99 $15,116 $15,314 $15,871 $15,374
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Short-Term Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers Short (1-3 Year) U.S.
Government Bond Index, which was the Fund's index until 2/28/98; the Lehman
Brothers Short (1-5 Year) Government/Corporate Index, the Fund's index beginning
on 3/1/98; and a benchmark index that combines the performance of these two
indices for their respective periods. The change in the index is a result of the
Fund's conversion from a government bond fund to a bond index fund, as discussed
in previous shareholder reports, which was completed as of 3/1/98.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
ASSETS
- --------------------------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 146,190
- --------------------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 181,451
- --------------------------------------------------------------------------------
Percentage growth over reporting period 24%
- --------------------------------------------------------------------------------
9
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
PORTFOLIO SNAPSHOT
The Schwab Short-Term Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate obligations and other U.S. government securities. The
information below provides a snapshot of the Fund's characteristics as of
2/28/99 and is not indicative of its composition after that date. The terms used
below are defined beginning on page 20. A complete list of the securities in the
Fund's portfolio as of 2/28/99 is provided in the Schedule of Investments later
in this report.
FUND FACTS
SCHWAB SHORT-TERM BOND LEHMAN BROTHERS
MARKET SHORT (1-5 YEAR) GOVERNMENT/
INDEX FUND CORPORATE INDEX
- --------------------------------------------------------------------------------
Number of Issues 46 2,653
- --------------------------------------------------------------------------------
Yield to Maturity 5.44% 5.50%
- --------------------------------------------------------------------------------
Average Coupon 5.77% 6.26%
- --------------------------------------------------------------------------------
Weighted Average Maturity 2.93 years 2.80 years
- --------------------------------------------------------------------------------
Average Quality AA+ AA+
- --------------------------------------------------------------------------------
Average Duration 2.42 years 2.40 years
- --------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- --------------------------------------------------------------------------------
*Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE
PERCENTAGE OF FUND
VALUE OF FUND INVESTMENTS
MATURITY RANGE (000S) INVESTMENTS (CUMULATIVE)
- -------------------------------------------------------------------------------
0 - 6 months $ 5,070 2.8% 2.8%
- -------------------------------------------------------------------------------
7 - 36 months $ 91,351 50.8% 53.6%
- -------------------------------------------------------------------------------
37 - 60 months $ 81,258 45.3% 98.9%
- -------------------------------------------------------------------------------
More than
60 months $ 2,000 1.1% 100.0%
- -------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
Short Medium Long
X High
Medium AVERAGE CREDIT QUALITY
Low
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the Fund's portfolio as of 2/28/99, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the Fund's weighted average maturity and the average credit quality of its
portfolio. The Fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
10
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
U.S. Treasury
obligations 72.8%
Corporate bonds(2) 21.6%
Agency obligations 5.6%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 78.4%
AA 2.3%
A 15.7%
BBB 3.6%
The charts above illustrate the composition of the Fund's portfolio as of
2/28/99 and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
- ----------------------------------------------------------------
U.S. Treasury Note, 5.50%, Maturity 12/31/00 9.31%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.50%, Maturity 2/29/00 6.03%
- ----------------------------------------------------------------
U.S. Treasury Note, 4.25%, Maturity 11/15/03 5.29%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.88%, Maturity 11/30/01 5.05%
- ----------------------------------------------------------------
U.S. Treasury Note, 4.75%, Maturity 02/15/04 4.67%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
U.S. Treasury Note, 5.75%, Maturity 11/30/02 3.92%
- ----------------------------------------------------------------
U.S. Treasury Note, 4.50%, Maturity 1/31/01 2.86%
- ----------------------------------------------------------------
U.S. Treasury Note, 6.38%, Maturity 09/30/01 2.83%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.75%, Maturity 04/30/03 2.80%
- ----------------------------------------------------------------
Federal Home Loan Bank, 6.26%, Maturity 08/09/99 2.77%
- ----------------------------------------------------------------
11
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (3/5/93)
- --------------------------------------------------------------------------------
SCHWAB TOTAL BOND MARKET
INDEX FUND(2),(3) 1.35% 5.98% 6.97% 6.73%
- --------------------------------------------------------------------------------
Benchmark Indices(4) 1.61% 6.27% 6.90% 6.56%
- --------------------------------------------------------------------------------
Lehman Brothers General U.S.
Government Bond Index (PRIOR) 0.75% 6.55% 6.96% 6.52%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index (NEW) 1.61% 6.26% 7.14% 6.75%
- --------------------------------------------------------------------------------
30-DAY SEC
YIELD
- --------------------------------------------------------------
SCHWAB TOTAL BOND MARKET INDEX FUND(2),(3) 5.52%
- --------------------------------------------------------------
Benchmark Indices(4) N/A
- --------------------------------------------------------------
Lehman Brothers General U.S. Government Bond Index (PRIOR) N/A
- --------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (NEW) N/A
- --------------------------------------------------------------
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 4.74%, 8.41%,
6.82% and 7.13%, respectively. The 30-day SEC yield as of 12/31/98 was 5.47%.(5)
(1) Actual, not annualized, since period is less than one year.
(2) Prior to 11/1/97, the Schwab Total Bond Market Index Fund was known as the
Schwab Long-Term Government Bond Fund. As reported in the Fund's annual
report dated 8/31/97, shareholders approved the proposed change to the
Fund's investment objective from an actively managed government bond
strategy to an index strategy at the shareholders' meeting held on 9/22/97.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
1.15%, 5.53%, 5.93% and 4.79%, respectively. The 30-day SEC yield as of
2/28/99 would have been 5.10%.
(4) This index represents the Lehman Brothers General U.S. Government Bond Index
for the period from the Fund's inception on 3/5/93 through 2/28/98, and the
Lehman Brothers Aggregate Bond Index from 3/1/98 through the end of the
reporting period. This benchmark is designed to show investors how a
hypothetical $10,000 investment in the Fund has performed since its
inception to the end of the reporting period by comparing it with the Fund's
prior and new indices.
(5) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
4.53%, 7.93%, 5.77% and 5.14%, respectively. The 30-day SEC yield as of
12/31/98 would have been 5.08%.
12
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
LEHMAN BROTHERS GENERAL LEHMAN BROTHERS
SCHWAB TOTAL BOND U.S. GOVERNMENT BOND AGGREGATE BOND BENCHMARK
MARKET INDEX FUND INDEX INDEX INDEX
3/5/1993 $10,000 $10,000 $10,000 $10,000
3/31/1993 $9,784 $9,926 $9,979 $9,979
4/30/1993 $9,890 $10,002 $10,048 $10,056
5/31/1993 $9,927 $9,991 $10,061 $10,045
6/30/1993 $10,314 $10,213 $10,244 $10,268
7/31/1993 $10,441 $10,276 $10,302 $10,330
8/31/1993 $10,863 $10,505 $10,482 $10,561
9/30/1993 $10,901 $10,545 $10,511 $10,601
10/31/1993 $10,952 $10,585 $10,550 $10,641
11/30/1993 $10,688 $10,468 $10,460 $10,524
12/31/1993 $10,738 $10,509 $10,517 $10,565
1/31/1994 $10,938 $10,653 $10,659 $10,710
2/28/1994 $10,544 $10,427 $10,474 $10,483
3/31/1994 $10,220 $10,193 $10,216 $10,247
4/30/1994 $10,112 $10,112 $10,134 $10,166
5/31/1994 $10,060 $10,099 $10,133 $10,153
6/30/1994 $10,027 $10,076 $10,110 $10,129
7/31/1994 $10,239 $10,261 $10,311 $10,316
8/31/1994 $10,233 $10,263 $10,324 $10,318
9/30/1994 $10,050 $10,118 $10,172 $10,172
10/31/1994 $10,036 $10,111 $10,163 $10,165
11/30/1994 $10,031 $10,093 $10,140 $10,147
12/31/1994 $10,122 $10,155 $10,210 $10,209
1/31/1995 $10,347 $10,344 $10,412 $10,399
2/28/1995 $10,647 $10,566 $10,660 $10,622
3/31/1995 $10,718 $10,633 $10,726 $10,689
4/30/1995 $10,887 $10,772 $10,875 $10,829
5/31/1995 $11,429 $11,206 $11,296 $11,266
6/30/1995 $11,445 $11,292 $11,379 $11,353
7/31/1995 $11,348 $11,250 $11,354 $11,311
8/31/1995 $11,566 $11,382 $11,491 $11,443
9/30/1995 $11,711 $11,491 $11,602 $11,553
10/31/1995 $11,931 $11,666 $11,753 $11,728
11/30/1995 $12,173 $11,848 $11,929 $11,911
12/31/1995 $12,395 $12,016 $12,096 $12,080
1/31/1996 $12,438 $12,090 $12,176 $12,154
2/29/1996 $12,075 $11,843 $11,964 $11,906
3/31/1996 $11,934 $11,745 $11,881 $11,807
4/30/1996 $11,766 $11,669 $11,814 $11,732
5/31/1996 $11,722 $11,650 $11,790 $11,712
6/30/1996 $11,885 $11,800 $11,948 $11,863
7/31/1996 $11,890 $11,829 $11,981 $11,893
8/31/1996 $11,830 $11,803 $11,960 $11,866
9/30/1996 $12,112 $11,999 $12,168 $12,063
10/31/1996 $12,451 $12,263 $12,439 $12,329
11/30/1996 $12,763 $12,477 $12,651 $12,543
12/31/1996 $12,537 $12,349 $12,534 $12,415
1/31/1997 $12,533 $12,363 $12,572 $12,429
2/28/1997 $12,556 $12,380 $12,604 $12,446
3/31/1997 $12,353 $12,249 $12,464 $12,314
4/30/1997 $12,606 $12,425 $12,651 $12,492
5/31/1997 $12,732 $12,532 $12,771 $12,599
6/30/1997 $12,918 $12,673 $12,923 $12,740
7/31/1997 $13,363 $13,033 $13,272 $13,102
8/31/1997 $13,152 $12,904 $13,159 $12,972
9/30/1997 $13,397 $13,097 $13,354 $13,167
10/31/1997 $13,687 $13,324 $13,548 $13,395
11/30/1997 $13,700 $13,392 $13,610 $13,463
12/31/1997 $13,778 $13,532 $13,747 $13,604
1/31/1998 $13,977 $13,735 $13,923 $13,809
2/28/1998 $13,938 $13,698 $13,912 $13,771
3/31/1998 $13,964 $13,736 $13,959 $13,818
4/30/1998 $14,035 $13,798 $14,032 $13,890
5/31/1998 $14,166 $13,940 $14,165 $14,022
6/30/1998 $14,263 $14,099 $14,286 $14,141
7/31/1998 $14,306 $14,121 $14,316 $14,171
8/31/1998 $14,575 $14,488 $14,549 $14,402
09/30/98 $14,930 $14,879 $14,890 $14,739
10/31/98 $14,844 $14,828 $14,811 $14,661
11/30/98 $14,866 $14,833 $14,895 $14,744
12/31/98 $14,937 $14,865 $14,940 $14,788
01/31/99 $15,061 $14,952 $15,046 $14,893
02/28/99 $14,770 $14,596 $14,783 $14,633
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Total Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers General U.S. Government Bond
Index, which was the Fund's index up until 2/28/98; the Lehman Brothers
Aggregate Bond Index, the Fund's index beginning on 3/1/98; and a benchmark
index that combines the performance of these two indices for their respective
periods. The change in the index is a result of a strategy change of the Schwab
Total Bond Market Index Fund, as discussed in previous shareholder reports,
which was completed as of 3/1/98.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
ASSETS
- ------------------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 119,469
- ------------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 381,786
- ------------------------------------------------------------------------
Percentage growth over reporting period 220%
- ------------------------------------------------------------------------
13
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
PORTFOLIO SNAPSHOT
The Schwab Total Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate obligations, mortgage-backed obligations, asset-backed
obligations and U.S. government agency securities. The information below
provides a snapshot of the Fund's characteristics as of 2/28/99 and is not
indicative of its composition after that date. The terms used below are defined
beginning on page 20. A complete list of the securities in the Fund's portfolio
as of 2/28/99 is provided in the Schedule of Investments later in this report.
FUND FACTS
SCHWAB TOTAL BOND MARKET LEHMAN BROTHERS AGGREGATE
INDEX FUND BOND INDEX
- --------------------------------------------------------------------------------
Number of Issues 65 7,410
- --------------------------------------------------------------------------------
Yield to Maturity 6.29% 6.14%
- --------------------------------------------------------------------------------
Average Coupon 7.65% 6.83%
- --------------------------------------------------------------------------------
Weighted Average Maturity 8.63 years 8.87 years
- --------------------------------------------------------------------------------
Average Quality AA AA
- --------------------------------------------------------------------------------
Average Duration 4.67 years 4.67 years
- --------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- --------------------------------------------------------------------------------
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE
PERCENTAGE OF FUND
VALUE OF FUND INVESTMENTS
MATURITY RANGE (000S) INVESTMENTS (CUMULATIVE)
- -------------------------------------------------------------------------------
0 - 1 year $ 98,527 22.2% 22.2%
- -------------------------------------------------------------------------------
2 - 10 years $ 276,375 62.1% 84.3%
- -------------------------------------------------------------------------------
11 - 20 years $ 15,113 3.4% 87.7%
- -------------------------------------------------------------------------------
21 - 30 years $ 29,804 6.7% 94.4%
- -------------------------------------------------------------------------------
More than
30 years $ 24,968 5.6% 100.0%
- -------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
Short Medium Long
X High
Medium AVERAGE CREDIT QUALITY
Low
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the Fund's portfolio as of 2/28/99, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the Fund's weighted average maturity and the average credit quality of its
portfolio. The Fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
14
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
U.S. Treasury obligations 42.8%
Corporate bonds(2)(3) 20.0%
Mortgage-backed
securities(3) 15.2%
Asset-backed
securities(2)(3) 14.0%
Agency obligations 7.7%
Temporary investments 0.3%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 73.6%
AA 8.8%
A 7.2%
BBB 8.9%
BB 1.2%
Temporary investments 0.3%
The charts above illustrate the composition of the Fund's portfolio as of
2/28/99 and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
- ----------------------------------------------------------------
Airplanes Pass-through Trust, 5.31%, Maturity 3/15/99 7.09%
- ----------------------------------------------------------------
U.S. Treasury Note, 4.25%, Maturity 11/15/03 5.40%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.38%, Maturity 6/30/03 4.13%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.50%, Maturity 2/28/03 4.09%
- ----------------------------------------------------------------
Public Service Enterprises, 5.78%, Maturity 11/22/99 3.93%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
U.S. Treasury Note, 4.75%, Maturity 11/15/08 3.77%
- ----------------------------------------------------------------
U.S. Treasury Note, 4.50%, Maturity 1/31/01 3.75%
- ----------------------------------------------------------------
Federal National Mortgage Association, 6.50%,
Maturity 3/1/29 3.64%
- ----------------------------------------------------------------
U.S. Treasury Note, 5.25%, Maturity 8/15/03 3.49%
- ----------------------------------------------------------------
Federal National Mortgage Association, 7.00%,
Maturity 3/1/29 3.18%
- ----------------------------------------------------------------
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the Funds continued to provide a high level of
current income consistent with the preservation of capital. The chart below
illustrates the income dividends on a per-share basis paid by each Fund during
each fiscal year or reporting period since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DIVIDENDS PAID BY THE SCHWAB BOND INDEX FUNDS
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
SCHWAB SHORT-TERM BOND MARKET SCHWAB TOTAL BOND MARKET
INDEX FUND (INCEPTION 11/5/91) INDEX FUND (INCEPTION 3/5/93)
1991* $0.10
1992 $0.60
1993** $0.37 $0.31
1994+ $0.54 $0.60
1995+ $0.59 $0.69
1996+ $0.59 $0.65
1997+ $0.59 $0.65
1998+ ++ $0.57 $0.60
1999TRIANGLE $0.25 $0.28
* Period from the Fund's inception on 11/5/91 through 12/31/91.
** Period from the Fund's inception on 3/5/93 through 8/31/93 for Schwab Total
Bond Market Index Fund and for the eight-month period ended 8/31/93 for
Schwab Short-Term Bond Market Index Fund.
+ For the one-year period ended 8/31 for both Funds.
++ The Schwab Total Bond Market Index Fund paid short- and long-term capital
gains of $0.05 and $0.02, respectively, on 12/31/98.
TRIANGLE For the six-month period ended 2/28/99 for both Funds.
16
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD--senior vice president and chief investment officer, has overall
responsibility for the management of each Fund's portfolio. Steve joined CSIM as
vice president and portfolio manager in April 1991 and was promoted to his
current position in August 1993. Prior to joining CSIM, Steve was vice president
and portfolio manager at Federated Investors.
KIM DAIFOTIS--vice president and senior portfolio manager, has had primary
responsibility for the day-to-day management of each Fund's portfolio since he
joined CSIM in November 1997. Prior to joining CSIM, Kim spent five years at
Lehman Brothers, where he served as vice president and fixed income
institutional salesperson, as well as senior portfolio strategist. Prior to
that, Kim spent three years as senior portfolio manager for Barclays Global
Investors.
17
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE FUNDS PERFORM DURING THE
SIX-MONTH REPORTING PERIOD?
A. Both Funds achieved positive returns over the six-month period; however, they
were somewhat lower than long-term average total returns--a result of the
overall increase in bond yields, which resulted in moderate decreases in the
Funds' net asset values (NAVs).
The SCHWAB SHORT-TERM BOND MARKET INDEX FUND achieved a total return of 1.50%
for the six-month reporting period ended February 28, 1999. This return came
from a combination of dividend income of 2.51% and a decline in the Fund's NAV
of 1.01%. The NAV decline was a result of higher prevailing bond yields at the
end of the period compared with the beginning of the period. The Fund's weighted
average maturity, which was 2.93 years as of February 28, 1999, remained fairly
constant throughout the reporting period.
The SCHWAB TOTAL BOND MARKET INDEX FUND achieved a total return of 1.35% for the
six-month reporting period ended February 28, 1999. This return came from a
combination of dividend income of 3.41% and a decline in the Fund's NAV of
2.06%. The NAV decline was a result of higher prevailing bond yields at
the end of the period compared with the beginning of the period. The Fund's
weighted average maturity, which was 8.63 years as of February 28, 1999,
increased moderately compared with the beginning of the period, when it was 7.84
years.
Q. HOW DID THE FUNDS' PERFORMANCE COMPARE WITH THEIR NEW BENCHMARKS?
A. The Funds' performance compared with their benchmark indices is shown in the
tables below.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
TOTAL RETURN TOTAL RETURN
FOR THE FOR THE
SIX MONTHS 12 MONTHS
ENDED ENDED
2/28/99 2/28/99
- --------------------------------------------------------------------------
Schwab Short-Term Bond
Market Index Fund 1.50% 5.31%
- --------------------------------------------------------------------------
Lehman Brothers Short (1-5 Year)
Government/Corporate Index 2.05% 6.02%
- --------------------------------------------------------------------------
Tracking Differential -0.55% -0.71%
- --------------------------------------------------------------------------
Typically, there will be a small gap between the performance of the index and
each Fund's actual performance. This gap occurs mainly because, unlike the
index, the Fund incurs operating expenses and trading costs and must keep a
small portion of its assets in cash for paying expenses and processing
shareholder orders. During the six-month reporting period, this gap, after
accounting for the Fund's operating expense, was -0.37%.
18
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
TOTAL RETURN TOTAL RETURN
FOR THE FOR THE
SIX MONTHS 12 MONTHS
ENDED ENDED
2/28/99 2/28/99
- -----------------------------------------------------------------------------
Schwab Total Bond
Market Index Fund 1.35% 5.98%
- -----------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index 1.61% 6.27%
- -----------------------------------------------------------------------------
Tracking Differential -0.26% -0.29%
- -----------------------------------------------------------------------------
As with the Schwab Short-Term Bond Market Index Fund, we typically anticipate a
small gap between the performance of the Schwab Total Bond Market Index Fund and
its benchmark index. During the six-month reporting period, this gap, after
accounting for the Fund's operating expenses, was -0.09%--within our
expectations given the elements described above. Since the Fund's change to an
index investment strategy on March 1, 1998, the gap (after accounting for the
Fund's operating expenses) has actually been slightly positive.
Many events combined to create a very challenging environment for bond fund
managers attempting to track indices and minimize tracking differential. These
included both positive and negative developments, including extreme volatility
in prices, spreads between government and corporate bond yields and liquidity in
the bond market. Moreover, the bond markets were also affected by the Russian
government's bond default and concerns over several hedge funds.
19
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high- income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax deductions and exemptions. The AMT
functions as a recapture mechanism, reclaiming some of the tax breaks primarily
available to high-income taxpayers, who without the AMT might be able to escape
taxation entirely.
BOND--A bond can be thought of as a loan agreement in which the bondholder lends
a set amount of money to a corporation, government agency or municipality and
expects to be repaid with interest. Although bonds are loans and contain no
rights of ownership, they do embody a legally enforceable promise to repay.
CALL--The right of bonds issuer to redeem a bond before its stated maturity
date. Bonds can be called for many reasons, but a call typically occurs when
interest rates drop and issuers are able to obtain lower interest rates to
finance their debts.
CALL PROTECTION--When managers seek call protection, they're looking for bonds
whose issuers cannot redeem them before their stated maturities, or who cannot
redeem them until a far-off date. Such bonds protect yield but are subject to
interest rate sensitivity.
COUPON--The coupon rate is the annual rate of interest on the bond's face value
that the issuer agrees to pay the holder until maturity. The coupon is
established at the time of issue and is determined by the then prevailing level
of interest rates in the marketplace. AVERAGE COUPON is the average interest
rate paid on the securities held by a fund. It is expressed as a percentage of
face value.
CREDIT RATINGS--Bonds are generally rated by one or both of the two major credit
rating agencies accepted in the industry: Moody's Investor Service and the
Standard & Poor's Corporation. They assign ratings based on the issuer's ability
to make the scheduled interest and principal payments. These ratings are
reviewed periodically and may be revised at any time.
MOODY'S S&P DESCRIPTION
- ------------------------------------------------------
INVESTMENT GRADE
Aaa AAA Strongest capacity to pay interest and
repay principal
Aa AA Very strong capacity to pay interest and
repay principal
A A Strong capacity to pay interest and
repay principal
Baa BBB Adequate capacity to pay interest and
repay principal
BELOW INVESTMENT GRADE
Ba BB Lowest degree of speculation with
respect to capacity to pay interest and
repay principal
B B Greater vulnerability to default but
currently has the capacity to meet
interest and principal payment
Caa CCC Currently vulnerable to default--
dependent on favorable conditions
Ca CC Highly speculative
C C Highest degree of speculation-- no
interest is paid
- - D In payment default
20
<PAGE>
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total investment, that
shareholders pay annually for mutual fund operating expenses and management
fees.
GENERAL OBLIGATION BONDS (GOS)--General obligation bonds are backed by a pledge
of the issuer's full faith and credit with the timely payment of principal and
interest secured by the taxing power of the issuer.
INTEREST--Compensation, usually paid semiannually, to bondholders by the issuer.
Usually expressed as an annual percentage rate.
INTEREST RATE RISK--Risk associated with fluctuations of bond prices in response
to the general movement of interest rates and to changes in investor perceptions
of government monetary policy and economic data.
MARKET RISK--The possibility that the actual return of an investment will be
less than what's expected.
MATURITY--The maturity of a security is the date the issuer makes the final
payment to the security holder. WEIGHTED AVERAGE MATURITY is the average length
of time until the bonds held by a fund reach maturity(or are called) and are
repaid. In general, the longer the average maturity, the more a fund's share
price will fluctuate in response to changes in market interest rates.
MORTGAGE-BACKED SECURITIES--Represent an ownership interest in mortgage loans
made by financial institutions to finance the borrower's purchase of a home or
other real estate. The most basic mortgage securities, known as PASS-THROUGHS,
or participation certificates, represent a direct ownership interest in a trust
composed of a pool of mortgage loans. The majority of mortgage securities are
issued and/or guaranteed by the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
MUNICIPAL BONDS--Debt obligations of states, cities, towns, municipalities,
municipal authorities and governmental entities. They are issued to build
schools, tunnels and bridges or to finance infrastructure repairs or
improvements. The interest earned typically is free of federal income taxes and,
in some cases, also may be free of state and/or local income taxes if purchased
by residents of the issuing state. Income for some investors may be subject to
AMT.
PREPAYMENT RISK--When interest rates are falling, many homeowners will refinance
their mortgages to take advantage of the new lower rates. As a result, when
interest rates decline, prepayments of mortgage-backed securities accelerate
beyond the initial pricing assumptions, which causes the average life and
maturity of the security to shorten.
REINVESTMENT RISK--The risk that a bondholder may be able to reinvest only at a
lower rate than originally planned. If yields fall, his reinvestment income and,
21
<PAGE>
GLOSSARY (continued)
consequently, his total return from holding the bond will fall relative to the
original yield. Conversely, if yields rise, total return will also rise.
REVENUE BONDS--Bonds with interest that is payable from a specific source of
revenue. They are generally issued to finance public projects such as bridges,
tunnels and water treatment facilities. The interest payments on a revenue bond
are typically derived from the revenues produced by the facility.
TAXABLE-EQUIVALENT YIELD--The yield needed on a taxable investment in order to
match the return offered on a tax-exempt investment. This calculation is an
important resource for determining which investments--taxable or
tax-exempt--would yield more. The taxable-equivalent yield calculation can
determine which investment offers the best return when all taxes--federal, state
and local--are taken into consideration.
TOTAL RETURN--The sum of interest, plus capital gains (or losses).
YIELD--The income generated by an investment, expressed as a percentage of its
price. Yield is only a measure of income and does not take into account the
appreciation (or depreciation) of a bond's value.
YIELD TO MATURITY--The overall rate of return an investor would receive if the
securities in a fund's portfolio were held to their maturity dates.
22
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
------- -------
U.S. GOVERNMENT SECURITIES -- 77.6% (a)
U.S. TREASURY OBLIGATIONS -- 72.1%
U.S. Treasury Notes
5.38%, 01/31/00 $ 4,000 $ 4,012
5.50%, 02/29/00 10,900 10,949
6.75%, 04/30/00 2,800 2,853
5.38%, 06/30/00 500 502
5.13%, 08/31/00 4,450 4,450
4.50%, 09/30/00 4,000 3,963
4.63%, 12/31/00 2,000 1,983
5.50%, 12/31/00 16,800 16,897
4.50%, 01/31/01 5,250 5,189
5.38%, 02/15/01 5,000 5,022
6.38%, 09/30/01 5,000 5,141
5.88%, 11/30/01 9,000 9,155
6.63%, 03/31/02 4,000 4,157
6.63%, 04/30/02 2,750 2,860
7.50%, 05/15/02 4,000 4,262
5.75%, 11/30/02 7,000 7,108
5.50%, 02/28/03 2,800 2,821
5.50%, 03/31/03 4,000 4,029
5.75%, 04/30/03 5,000 5,083
5.50%, 05/31/03 3,000 3,022
5.38%, 06/30/03 2,250 2,258
5.25%, 08/15/03 3,000 2,996
5.75%, 08/15/03 4,000 4,071
4.25%, 11/15/03 10,000 9,591
4.75%, 02/15/04 8,650 8,477
--------
130,851
--------
AGENCY OBLIGATIONS -- 5.5%
Federal Home Loan Bank
6.26%, 08/09/99 5,000 5,023
Federal National Mortgage Association
6.45%, 03/26/01 5,000 5,002
---------
10,025
---------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $141,059) 140,876
---------
CORPORATE BONDS -- 21.4% (a)
American General Finance
6.25%, 12/18/02 2,000 2,012
American Home Products Corp.
7.70%, 02/15/00 2,000 2,040
Bank of New York Co., Inc.
6.63%, 06/15/03 2,000 2,045
Bank One Corp.
7.25%, 08/01/02 2,000 2,075
Par Value
------- -------
Columbia Gas Systems
6.39%, 11/28/00 $ 2,000 $ 2,020
Comdisco, Inc.
6.38%, 11/30/01 1,500 1,500
Ford Motor Credit
7.00%, 09/25/01 2,000 2,055
General Motors Acceptance Corp.
5.75%, 11/10/03 1,000 991
Hertz Corp.
7.00%, 05/01/02 2,000 2,032
KN Energy, Inc.
6.30%, 03/01/01 2,000 2,003
Korea Electric Power
7.00%, 10/01/02 3,000 2,884
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,479
Pepsi Bottling Holdings, Inc.
5.38%, 02/17/04 5,000 4,888
Philip Morris Companies, Inc.
6.15%, 03/15/00 3,000 3,000
Quebec Province
7.50%, 07/15/02 2,000 2,093
US West Capital Funding Inc.
6.13%, 07/15/02 1,500 1,504
Wal-Mart Stores
5.65%, 02/01/10 2,000 2,000
WestPac Banking Corp.
9.13%, 08/15/01 2,000 2,135
---------
TOTAL CORPORATE BONDS
(Cost $38,800) 38,756
---------
Shares
--------
TEMPORARY INVESTMENTS -- 0.0% (c)
Provident Institutional Funds -
Fed Funds Portfolio
4.51% 47 47
---------
TOTAL TEMPORARY INVESTMENTS
(Cost $47) 47
---------
TOTAL INVESTMENTS -- 99.0%
(Cost $179,906) 179,679
---------
OTHER ASSETS AND LIABILITIES-- 1.0%
Other assets 42,243
Liabilities (40,471)
---------
1,772
---------
TOTAL NET ASSETS-- 100.0% $181,451
=========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
23
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
------- -------
U.S. GOVERNMENT SECURITIES -- 76.6% (a)
U.S. TREASURY OBLIGATIONS -- 49.9%
U.S. Treasury Bonds
6.13%, 11/15/27 $ 1,300 $ 1,364
5.50%, 08/15/28 10,000 9,688
5.25%, 02/15/29 3,000 2,857
U.S. Treasury Notes
6.75%, 04/30/00 2,500 2,547
5.38%, 07/31/00 5,000 5,016
5.13%, 08/31/00 5,000 5,000
4.50%, 09/30/00 6,000 5,944
4.00%, 10/31/00 4,000 3,927
4.63%, 12/31/00 10,500 10,408
4.50%, 01/31/01 14,500 14,332
5.75%, 11/30/02 6,250 6,346
5.50%, 02/28/03 15,500 15,616
5.50%, 03/31/03 2,500 2,518
5.75%, 04/30/03 8,000 8,132
5.50%, 05/31/03 9,500 9,571
5.38%, 06/30/03 15,700 15,756
5.25%, 08/15/03 13,350 13,334
5.75%, 08/15/03 4,000 4,071
4.25%, 11/15/03 21,500 20,621
4.75%, 02/15/04 3,250 3,185
7.25%, 05/15/04 3,000 3,260
6.50%, 05/15/05 2,500 2,648
6.13%, 08/15/07 3,300 3,456
5.50%, 02/15/08 6,450 6,523
4.75%, 11/15/08 15,000 14,390
---------
190,510
---------
AGENCY OBLIGATIONS -- 9.0%
Federal Home Loan Mortgage Corp.
5.25%, 02/16/01 5,000 4,965
Federal National Mortgage Association
5.75%, 04/15/03 5,000 5,031
5.13%, 02/13/04 5,000 4,896
5.63%, 02/20/04 10,000 9,862
5.25%, 01/15/09 10,000 9,569
---------
34,323
---------
Par Value
------- -------
MORTGAGE-BACKED OBLIGATIONS -- 17.7% (d)
Federal National Mortgage Association
6.50%, 03/01/14 $ 9,000 $ 9,059
7.00%, 03/01/14 4,000 4,079
6.00%, 03/01/29 5,000 4,847
6.50%, 03/01/29 14,000 13,903
7.00%, 03/01/29 12,000 12,146
7.50%, 03/01/29 7,000 7,188
8.00%, 03/01/29 3,000 3,121
Government National Mortgage
Association
6.50%, 03/01/29 4,000 3,977
7.00%, 03/01/29 5,000 5,070
7.50%, 03/01/29 4,000 4,115
---------
67,505
---------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $294,482) 292,338
---------
CORPORATE BONDS -- 23.2% (a)
Argentaria Capital Funding
5.35%, 05/10/99(b) 10,000 9,950
Centaur Funding Corp.
9.08%, 04/21/20 7,000 7,717
Comcast Cable Communications Corp.
6.20%, 11/15/08 5,000 4,956
Dell Computer
7.10%, 04/15/28 3,000 3,034
General Motors Acceptance Corp.
5.75%, 11/10/03 2,000 1,982
GTE Corp.
6.94%, 04/15/28 5,000 5,144
Korea Electric Power
7.00%, 10/01/02 5,000 4,806
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,479
Lucent Technologies, Inc.
5.50%, 11/15/08 2,000 1,923
Merrill Lynch & Co., Inc.
5.40%, 03/24/99(b) 5,000 5,000
6.00%, 02/17/09 5,000 4,838
Nabisco, Inc.
6.00%, 02/15/11 2,000 1,975
NationsBank Corp.
6.50%, 03/15/06 2,000 2,030
24
<PAGE>
Par Value
------- -------
Pepsi Bottling Holdings, Inc.
5.63%, 02/17/09 $ 7,000 $ 6,738
Public Service Enterprises
5.78%, 11/22/99(b) 15,000 15,000
Qwest Communications International, Inc.
7.50%, 11/01/08 5,000 5,275
Saks, Inc.
7.25%, 12/01/04 2,000 2,025
Suntrust Capital III
5.87%, 03/15/99(b) 5,000 4,820
---------
TOTAL CORPORATE BONDS
(Cost $88,411) 88,692
---------
ASSET-BACKED OBLIGATIONS -- 16.3% (a) (b)
Advanta Mortgage Loan Trust
Series 1998-1 A-7/(MBIA Insurance)
5.15%, 03/25/99 6,928 6,932
Airplanes Pass Through Trust
Series 1R, Class A8
5.31%, 03/15/99 27,000 27,084
Discover Card Master Trust I,
Series 94-2, Class A
5.29%, 03/15/99 10,000 10,075
First USA Credit Card Master Trust
5.18%, 03/15/99 7,000 7,024
Par Value
------- -------
Provident Bank Home Equity Loan
Trust Series 1997-2 Class A5
5.17%, 03/25/99 $ 7,584 $ 7,593
Southern Pacific Secured Asset Corp.
Series 1998 A-1/(MBIA Insurance)
5.14%, 03/25/99 3,593 3,596
--------
TOTAL ASSET-BACKED OBLIGATIONS
(Cost $62,221) 62,304
---------
Shares
--------
TEMPORARY INVESTMENTS -- 0.4% (c)
Provident Institutional Funds -
Fed Funds Portfolio
4.51% 1,453 1,453
---------
TOTAL TEMPORARY INVESTMENTS
(Cost $1,453) 1,453
---------
TOTAL INVESTMENTS -- 116.5%
(Cost $446,567) 444,787
---------
OTHER ASSETS AND LIABILITIES-- (16.5%)
Other assets 69,386
Liabilities (132,387)
---------
(63,001)
---------
TOTAL NET ASSETS-- 100.0% $381,786
=========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
25
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
For the six months ended February 28, 1999 (Unaudited)
(a) Interest rates represent coupon rate of security.
(b) Variable rate obligations -- Interest rates vary periodically based on
current market rates. Rates shown are the effective rates as of the report
date. Dates shown represent the later of the demand date or next interest
rate change date. For variable rate obligations without demand features,
the next interest reset date is shown. All dates shown are considered the
maturity date for financial reporting purposes.
(c) Interest rates represent the yield on report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into
the transaction. The transaction is subject to market fluctuation and to
the risk that the value may be more or less than the purchase price when
the transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
PORTFOLIO ABBREVIATIONS
MBIA Municipal Bond Investors Assurance Corporation.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1999 (Unaudited)
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
ASSETS
Investments, at value (Cost:
$179,906, $446,567, respectively) $179,679 $444,787
Receivables:
Interest 2,585 3,888
Investments sold 39,406 64,213
Fund shares sold 245 1,264
Prepaid expenses 7 21
-------- --------
Total assets 221,922 514,173
-------- --------
LIABILITIES
Payables:
Dividends 64 182
Investments purchased 40,177 131,179
Fund shares redeemed 178 416
Due to counterparties
(see Note 2) -- 531
Investments advisory
and administration fees 13 --
Transfer agency and
shareholder service fees 10 17
Other liabilities 29 62
-------- --------
Total liabilities 40,471 132,387
-------- --------
Net assets applicable to
outstanding shares $181,451 $381,786
======== ========
NET ASSETS CONSIST OF:
Paid-in-capital $191,150 $384,537
Distributions in excess
of net investment income (42) (38)
Accumulated net realized
loss on investments sold (9,430) (104)
Net unrealized depreciation on
investments and swap agreements (227) (2,609)
-------- --------
$181,451 $381,786
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 18,513 38,308
Net asset value, offering
and redemption price per share $9.80 $9.97
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1999 (Unaudited)
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
Interest income $ 4,663 $ 9,671
-------- -------
Expenses:
Investment advisory and
administration fees 349 666
Transfer agency and shareholder
service fees 213 406
Custodian and portfolio
accounting fees 45 68
Registration fees 21 35
Professional fees 6 7
Shareholder reports 9 11
Trustees' fees 3 4
Proxy fees -- 1
Other expenses 4 5
-------- -------
650 1,203
Less: expenses reduced (see Note 4) (344) (659)
-------- -------
Total expenses incurred by Fund 306 544
-------- -------
Net investment income 4,357 9,127
-------- -------
Net realized gain on investments sold 243 712
Net unrealized depreciation on investments (2,213) (5,476)
Net unrealized depreciation on swap agreements -- (939)
-------- -------
Net loss on investments (1,970) (5,703)
-------- -------
Increase in net assets resulting from operations $ 2,387 $ 3,424
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------------------------- -----------------------------
Six months Year Six months Year
ended ended ended ended
February 28, 1999 August 31, February 28, 1999 August 31,
(Unaudited) 1998 (Unaudited) 1998
----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 4,357 $ 7,988 $ 9,127 $ 8,308
Net realized gain on
investments sold 243 1,170 712 1,762
Net unrealized appreciation
(depreciation) on investments (2,213) 1,341 (5,476) 3,281
Net unrealized appreciation
(depreciation) on swap agreements -- -- (939) 110
-------- -------- -------- --------
Increase in net assets resulting
from operations 2,387 10,499 3,424 13,461
-------- -------- -------- --------
Distributions:
Dividends to shareholders
from net investment income (4,332) (8,180) (9,091) (8,398)
Distributions to shareholders
from net realized gains -- -- (2,225) --
-------- -------- -------- --------
Total distributions to
shareholders (4,332) (8,180) (11,316) (8,398)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 57,121 70,549 145,132 283,044
Net asset value of shares issued
in reinvestment of dividends 3,353 6,283 10,524 7,336
Less payments for shares redeemed (34,499) (49,190) (59,998) (26,201)
-------- -------- -------- --------
Increase in net assets from
capital share transactions 25,975 27,642 95,658 264,179
-------- -------- -------- --------
Total increase in net assets 24,030 29,961 87,766 269,242
Net assets:
Beginning of period 157,421 127,460 294,020 24,778
-------- -------- -------- --------
End of period (including
distributions in excess of net
investment income of ($42),
($67), ($38) and ($74),
respectively) $181,451 $157,421 $381,786 $294,020
======== ======== ======== ========
Number of fund shares:
Sold 5,742 7,182 14,239 28,231
Reinvested 338 640 1,034 731
Redeemed (3,466) (5,009) (5,859) (2,610)
-------- -------- -------- --------
Net increase in shares outstanding 2,614 2,813 9,414 26,352
Shares outstanding:
Beginning of period 15,899 13,086 28,894 2,542
-------- -------- -------- --------
End of period 18,513 15,899 38,308 28,894
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Short-TermBond Market Index Fund
------------------------------------------------------------
19991 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.90 $ 9.74 $ 9.67 $ 9.84 $ 9.81 $ 10.64
-------- -------- -------- -------- -------- --------
From investment operations:
Net investment income 0.25 0.56 0.59 0.59 0.59 0.54
Net realized andunrealized gain (loss) on
investments (0.10) 0.17 0.07 (0.17) 0.03 (0.71)
-------- -------- -------- -------- -------- --------
Total from investment operations 0.15 0.73 0.66 0.42 0.62 (0.17)
Less distributions:
Dividends from net investment income (0.25) (0.57) (0.59) (0.59) (0.59) (0.54)
Distributions from net realized
gain on investments -- -- -- -- -- (0.12)
-------- -------- -------- -------- -------- --------
Total distributions (0.25) (0.57) (0.59) (0.59) (0.59) (0.66)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 9.80 $ 9.90 $ 9.74 $ 9.67 $ 9.84 $ 9.81
======== ======== ======== ======== ======== ========
Total return (%) 1.50** 7.64 6.96 4.39 6.61 (1.67)
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------
Ratio of net operating expenses
to average net assets 0.36* 0.46 0.49 0.49 0.58 0.60
Reductions reflected in above
expense ratio 0.40* 0.39 0.33 0.31 0.23 0.21
Ratio of net investment income
to average net assets 5.12* 5.58 6.02 6.03 6.11 5.28
Portfolio turnover rate 64 128 71 80 203 91
Net assets, end of period (000s) $181,451 $157,421 $127,460 $134,019 $157,191 $190,479
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Total Bond Market Index Fund
------------------------------------------------------------
19991 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.18 $ 9.75 $ 9.38 $ 9.80 $ 9.33 $10.53
-------- -------- ------- ------- ------- ------
From investment operations:
Net investment income 0.28 0.60 0.65 0.65 0.69 0.60
Net realized andunrealized gain (loss) on
investments (0.14) 0.43 0.37 (0.42) 0.47 (1.20)
-------- -------- ------- ------- ------- ------
Total from investment operations 0.14 1.03 1.02 0.23 1.16 (0.60)
Less distributions:
Dividends from net investment income (0.28) (0.60) (0.65) (0.65) (0.69) (0.60)
Distributions from net realized
gain on investments (0.07) -- -- -- -- --
-------- -------- ------- ------- ------- ------
Total distributions (0.35) (0.60) (0.65) (0.65) (0.69) (0.60)
-------- -------- ------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 9.97 $ 10.18 $ 9.75 $ 9.38 $ 9.80 $ 9.33
======== ======== ======= ======= ======= ======
Total return (%) 1.35** 10.83 11.18 2.29 13.03 (5.80)
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------
Ratio of net operating expenses
to average net assets 0.34* 0.31 0.20 -- -- 0.10
Reductions reflected in above
expense ratio 0.40* 0.51 0.98 1.17 1.18 2.09
Ratio of net investment income
to average net assets 5.62* 5.86 6.74 6.67 7.38 6.27
Portfolio turnover rate 71 285 51 66 240 123
Net assets, end of period (000s) $381,786 $294,020 $24,778 $22,761 $12,949 $7,108
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1999 (Unaudited)
(All dollar amounts are in thousands unless otherwise noted)
1. DESCRIPTION OF THE FUNDS
The Schwab Short-Term Bond Market Index Fund and Schwab Total Bond Market Index
Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no-load,
open-end, investment management company organized as a Massachusetts business
trust on October 26, 1990 and registered under the Investment Company Act of
1940 (the "Act"), as amended.
In addition to the Funds, the Trust also offers the Schwab 1000
Fund(REGISTRATION MARK), Schwab California Short/Intermediate Tax-Free Bond
Fund, Schwab California Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund. The assets of each
series are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
The value of each swap agreement is determined in accordance with a specified
formula reflective of the agreement's individual terms. Short-term securities
with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
SECURITY TRANSACTIONS, INTEREST INCOME AND REALIZED GAINS (LOSSES) -- Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is accrued on a daily basis and includes
accretion of original issue discount and amortization of market premium. For
callable bonds purchased at a premium, the excess of the purchase price over the
call value is amortized against interest income through the call date. If the
call provision is not exercised, any remaining premium is amortized through the
final maturity date. Realized gains and losses from security transactions are
determined on an identified cost basis.
SWAP AGREEMENTS -- Each Fund may enter into swap agreements, which are an
exchange of one security or asset for another. A swap may be entered into in
order to, among other things, change the maturity of a fund's portfolio, to
protect a fund's value from changes in interest rates, to expose a fund to a
different security or market, or to help a fund achieve a strategy relative to
an index or other benchmark. By entering into a swap agreement, a fund is
exposed to the risks of unanticipated movements in interest rates or in the
value of an underlying security or index, or that the counterparty will not
fulfill its obligation under the agreement.
32
<PAGE>
As of February 28, 1999, the Schwab Total Bond Market Index Fund had the
following outstanding swap agreements with the following terms:
<TABLE>
<CAPTION>
Amounts due
Notional Termination Payments made Payments received to counter
Swap counterparty amount date by the Fund by the Fund parties
- ------------------ -------- ----------- ------------- ------------------------------------ -----------
<S> <C> <C> <C> <C> <C>
Goldman Sachs $25,000 9/1/99 Based on Mortgage Component of the
Capital Markets 1 month LIBOR Lehman Brothers Aggregate Bond Index $123
Goldman Sachs $27,000 6/1/99 Based on Mortgage Component of the
Capital Markets 3 Month LIBOR Lehman Brothers Aggregate Bond Index $230
</TABLE>
As of February 28, 1999, the total amounts due to counter parties are $531,
which includes a terminated but unsettled swap agreement of $178. Net income or
loss from the swap agreements is included in net investment income.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Each Fund declares a dividend
daily, substantially equal to its net investment income for that day, payable
monthly. Distributions from net realized capital gains, if any, are recorded on
ex-dividend date, payable annually.
EXPENSES -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its net investment income and net realized
capital gains, if any, to shareholders. Therefore, no federal income tax
provision is required. Each Fund is considered a separate entity for tax
purposes.
Net unrealized appreciation (depreciation) for federal income tax purposes at
February 28, 1999 was as follows:
Net unrealized Appreciated Depreciated
depreciation securities securities
-------------- ----------- -----------
Schwab Short-Term Bond
Market Index Fund $ (199) $ 869 $(1,068)
Schwab Total Bond Market
Index Fund $(2,562) $1,270 $(3,832)
The cost at February 28, 1999 for federal income tax purposes for the Schwab
Short-TermBond Market Index Fund and the Schwab Total Bond Market Index Fund was
$179,878 and $446,520, respectively.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1998, the unused capital loss
carryforwards for federal income tax purposes, were as follows:
Schwab Short-Term
Bond Market Index Fund
----------------------
Expiring in:
08/31/03 $ 7,257
08/31/04 2,216
08/31/05 172
-------
Total capital loss carryforwards $ 9,645
=======
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Adviser"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Adviser has reduced a portion of its
fee for the six months ended February 28, 1999 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Adviser and/or Schwab. During the
six months ended February 28, 1999, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the act,
as amended. The Funds incurred fees aggregating $7 related to the Trust's
unaffiliated trustees.
OTHER AFFILIATED PARTIES AND TRANSACTIONS -- As of February 28, 1999, 12.4%,
28.6%, 19.2% and 0.6% of the Schwab Total Bond Market Index Fund's outstanding
shares were owned by Schwab MarketTrack Growth Portfolio, Schwab MarketTrack
Balanced Portfolio, Schwab MarketTrack Conservative Portfolio and Schwab
MarketTrack Growth Portfolio II, respectively.
34
<PAGE>
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The Investment Adviser and Schwab guarantee that, effective November 1, 1998
through at least October 31, 1999, the Schwab Short-Term Bond Market Index Fund
and Schwab Total Bond Market Index Fund's total operating expenses will not
exceed 0.35% of each Fund's average daily net assets, after reductions and
reimbursements. Prior to November 1, 1998, the Investment Adviser and Schwab
guraranteed that the Schwab Short-Term Bond Market Index Fund and Schwab Total
Bond Market Index operating expenses would not exceed 0.38% and 0.30%,
respectively. For the purpose of this guarantee, operating expenses do not
include interest expenses, extraordinary expenses and taxes.
During the six months ended February 28, 1999, the total of such fees reduced by
the Investment Adviser was $344 for the Schwab Short-Term Bond Market Index Fund
and $659 for the Schwab Total Bond Market Index Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than U.S.
government securities and short-term obligations during the six months ended
February 28, 1999, were as follows:
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
Purchases $17,840 $78,828
Proceeds of sales and
maturities $11,777 $50,305
Purchases, sales and maturities of long-term U.S. government securities during
the six months ended February 28, 1999, were as follows:
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
Purchases $117,399 $324,192
Proceeds of sales and
maturities $ 96,477 $190,310
35
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please call 800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds-Registered Trademark- at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(1) that seek high current income
consistent with safety and liquidity. Choose from taxable or tax-advantaged
alternatives. Many can be linked to your Schwab account to "sweep" cash balances
automatically when you're between investments. Or, for your larger cash
reserves, choose one of our Value Advantage Investments.-Registered Trademark-
(1) Investments in money market funds are neither insured nor guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any other government agency
and, although they seek to preserve the value of your investment at $1 per
share, it is possible to lose money.
<PAGE>
SCHWAB FUNDS [LOGO]
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
P.O. Box 7575, San Francisco, CA 94120-7575
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 1999 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. (0099-1495) MKT3480-1 (4/99)
